Should long-term debt be discounted during martial law?

Is there any discounting of reimbursable financial assistance received during martial law, for example, in the second quarter of 2022 and returned in the fourth quarter of 2023?

In accordance with sub-clause 14.1.257 of the Tax Code, reimbursable financial assistance is the amount of funds received by the taxpayer for use under an agreement that does not provide for the accrual of interest or other types of compensation in the form of payment for the use of such funds, and is mandatory for return.

Pursuant to subpara. 134.1.1 of the TCU, the object of corporate income tax is profit with a source of origin in Ukraine and abroad, which is determined by adjusting (increasing or decreasing) the financial result before taxation (profit or loss) determined in the financial statements of the company in accordance with national accounting regulations (standards) or international financial reporting standards by the differences determined by the relevant provisions of the TCU.

The TCU does not provide for adjustments to the financial result before taxation for transactions involving the receipt of repayable financial assistance provided to an enterprise for a period of more than 12 months, discounting such debt over the term of use. Such transactions are reflected in accordance with the accounting rules in the formation of the financial result before tax.

As of today, the position on this issue is set out in the letter of the Ministry of Finance of Ukraine dated 20.02.2024 No. 41010-06-62/5120, which is as follows.

Regulation of accounting and financial reporting methodology is carried out by the central executive body that ensures the formation and implementation of state policy in the field of accounting and auditing, approves national accounting regulations (standards), national accounting regulations (standards) in the public sector, other regulations on accounting and financial reporting (part two of Article 6 of the Law of Ukraine No. 996-XIV "On Accounting and Financial Reporting" dated July 16, 1999).

In accordance with Law No. 996, a liability is an enterprise's debt that arose as a result of past events and the repayment of which is expected to result in a decrease in the enterprise's resources embodying economic benefits in the future.

The basis for accounting for business transactions is the primary documents, which must have the mandatory details required by Law No. 996. A primary document is a document that contains information about a business transaction (an action or event that causes changes in the structure of assets and liabilities, and the company's equity).

The company's accounting and financial statements should be based, in particular, on the accrual basis, according to which income and expenses are recognized in the accounting and financial statements when they occur, regardless of the date of receipt or payment of funds.

In accordance with the Procedure for Presentation of Financial Statements approved by the Resolution of the Cabinet of Ministers of Ukraine No. 419 dated 28.02.2000, financial statements and consolidated financial statements are prepared in accordance with national accounting regulations (standards) or international financial reporting standards (IFRS) or national public sector accounting regulations (standards) in accordance with the law.

If a company applies IFRS for accounting and financial reporting in accordance with the law, then IFRS requirements are the accounting rules that are used to record business transactions and prepare financial statements.

If the company applies the UAS, accounting for business transactions under long-term liabilities, including the need to discount reimbursable financial assistance, is carried out in accordance with UAS 11 "Liabilities", approved by the order of the Ministry of Finance dated 31.01.2000, No. 20 (hereinafter - NSAU 11), NSAU 13 "Financial Instruments", approved by the Order of the Ministry of Finance of Ukraine No. 559 dated 30.11.2001, and the Instruction on the Application of the Plan of Accounts for Accounting for Assets, Capital, Liabilities and Business Transactions of Enterprises and Organizations, approved by the Order of the Ministry of Finance of Ukraine No. 291 dated 30.11.1999.

In accordance with NAS 11, current liabilities are liabilities that will be settled within the operating cycle of the company or are due within twelve months from the balance sheet date.

According to NP(S)BU 6 "Corrections of Errors and Changes in Financial Statements", approved by the order of the Ministry of Finance dated 28.05.1999 No. 137, the balance sheet date is the date on which the company's balance sheet is prepared. Usually, the balance sheet date is the end of the last day of the reporting period.

In accordance with Law No. 996, the reporting period for financial statements is a calendar year. Interim financial statements are prepared based on the results of the first quarter, first half of the year, and nine months.

The official website of the Ministry of Finance contains an information notice on the discount rate for long-term receivables and long-term liabilities in the subsection "Accounting/ Accounting in the business sphere/General explanations" of the section "Accounting and audit activities" of the section "Activities".

In accordance with Law No. 996, the purpose of accounting and financial reporting is to provide users with complete, truthful and unbiased information about the financial position and results of the company's operations for decision-making purposes.

The company's accounting records are kept continuously from the date of registration of the company until its liquidation.

The UAS do not contain any rules on the specifics of discounting long-term debt during martial law in Ukraine.

As a general rule, companies that keep records in accordance with the UAS are required to discount long-term receivables and payables.

At the same time, it does not matter what size the company is (micro, small, medium or large), or what taxation system it is subject to (general or simplified).

Please note that a long-term receivable is one that does not arise during the normal operating cycle and will be settled after 12 months from the balance sheet date (clause 4 of NRS 10 "Receivables").

It follows that when a company incurs debt (for example, it has received reimbursable financial assistance from another company) with a maturity of more than 12 months, such debt is subject to discounting.

The amount of repayable financial assistance provided with a repayment period of less than 12 months is accounted for as a current receivable in the debit of subaccount 377 "Settlements with other debtors".

If the term of the aid is more than 12 months, it is accounted for in subaccount 183 "Other receivables". Long-term accounts receivable are recognized in the balance sheet at their present value (clause 12 of NRS 10 "Accounts Receivable"). Discounting is used to determine the present value of the debt.

It should be emphasized that during martial law, there are no specifics for discounting reimbursable financial assistance.

In view of the foregoing, the reimbursable financial assistance received during the martial law, in particular in the second quarter of 2022 and repaid in the fourth quarter of 2023, with a maturity of more than 12 months, is subject to discounting.